Some Contract Do’s & Don’ts

Issues that we see frequently with business contracts:

  1. Main issue is when folks try to draft their own contracts:
    • Example 1 – $120k promissory note – lender used a form note and borrower crossed off all of the important language (acceleration clause, attorney’s fees). Lender was embarrassed to call an attorney because he was friends with the borrower. BIG MISTAKE;
    • Example 2 – to save money, client had a lawyer draft a base template of a contract but the language the parties used to fill in the blanks was terrible. The lawyer, who was not a business attorney, didn’t do a very good job with the base document but, luckily, the contracting parties were friends and we were able to fix the issues in a subsequent amendment;
    • Key Point – generally, most lay people don’t have the experience to draft anything other than a simple contract.
    • It’s like whether or not to use a doctor. You shouldn’t try and diagnose yourself if you feel there is something wrong beyond just a common cold or the flu;
    • Remember, if there is a dispute down the road, it is reviewed by a Judge or arbitrator and these individuals are lawyers so they will hold your contract to a higher standard than you might think.
  2. Now, you don’t need a lawyer every time – some contracts of low value don’t justify it but in most cases, we strongly recommend that you have an experienced business attorney review or even better draft the contract for you. It will likely pay for itself;
  3. Whether or not you have an attorney, the following provisions should be in most contracts:
    • Venue clause – provides for disputes to be resolved in the Court closest to YOU and that the law of your state (CA) apply to the contract. Otherwise, if you are dealing with an out-of-state customer or other contracting party, you generally need to go their jurisdiction if you want to sue;
    • Attorney’s fee clause – many people are surprised to learn that in CA (and most states that we are aware of), the party that wins a lawsuit is not automatically entitled to recover their attorney’s fees from the other side unless they have a contract which specifically provides that the prevailing party is entitled to reimbursement. Therefore, in smaller cases (and even some larger cases) where there is no such contract provision, it might not make economic sense to pursue a claim since the attorney’s fees might end up exceeding the amount of the claim. We have had to explain this to clients on many occasions and it causes them to give up claims they might otherwise pursue;
    • Payment terms – We’ve seen contracts where people forget to put in payment terms or a date for final repayment. In those cases, a Judge will likely impose a “reasonable” period of time for repayment but what is “reasonable” is far from certain in most cases;
    • Penalties for nonpayment and interest – in addition to attorney’s fees. Use them to increase the pain for non-compliance under the contract;
    • Start and End Dates – contracts for an unlimited time are generally not enforceable;
    • Termination clauses – need to have the right to terminate for cause or expiration of term and beware of clauses that provide for auto-renewal. You either need to cross out that language or make sure you calendar a reminder to terminate on time.
    • Contracting Parties and Signature blocks – have seen many cases where someone has formed a corp or LLC but sign the contract in their own name or have the entity name at the beginning of the contract but sign personally. You need to make sure your ENTITY is the contracting party AND the signing party in the signature block.
  4. What about those form contracts from large companies? – Everything is negotiable. If they won’t eliminate/modify the contract based on legitimate issues you have, then think twice about signing it.
  5. What about Legal Zoom and other online contracts? – We’ve actually seen some good ones for routine situations (Promissory Notes) where you can just fill in the names of the parties, date, amount and payment terms but for most contracts, you really need a human being with a law degree to draft/review.
Art Matthews, Esq.

Art Matthews is experienced and knowledgeable in a broad
spectrum of areas related to business litigation, including
contract, real estate and unfair business practices.